New Banks will have to lend 40% to priority sector and 25% branches in unbanked areas

For every Rs.100 that a prospective applicant (for new banking license) wants to lend, he will have to lend Rs.40 to small farmers, students or low cost home borrowers and entrepreneurs, at par with the existing norms for existing banks.

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MUMBAI: For every Rs.100 that a prospective applicant (for new banking license) wants to lend, he will have to lend Rs.40 to small farmers, students or low cost home borrowers and entrepreneurs, at par with the existing norms for existing banks.

According to the latest guidelines for licensing on new banks in the private sector, Reserve Bank of India mandates the applicants to build their portfolio for lending to priority sector that includes education, agriculture(direct and indirect lending), low cost home loans(upto Rs15 lakh), small and micro enterprises at the time of starting banking operations. The new licensees will have to provide 40% of the total advances towards priority sector, as is the norm with existing public and private sector banks.

"Applicants for new bank licenses will be required to furnish their business plans for the banks along with their applications," the Reserve Bank guidelines said, "The business plan will have to address how the bank proposes to achieve financial inclusion,"

In financial year ending 2012, Indian banks struggled to meet their priority sector lending targets, especially after the revision of sub limits in various segments that are part of priority sector like direct and indirect lending( sub limit of 4.5% on indirect lending). But analysts feel, the worry is not as much as meeting the targets, as it is reaching out to unbanked areas.

"Those ready and waiting for a license reconsider it, since it is not a very profitable business," said K C Chakrabarty, deputy governor, Reserve Bank of India on 31 December 2012 at a book launch. According to the RBI guidelines, new banks will have to open 25% of the branches in the non banked areas. One of the objectives of introducing these targets for the new banks has been, to fast track the process of financial inclusion and reaching out to, so far unbanked areas.

"Wholesale funding should not be tough," said Kajal Gandhi, analyst with ICICI Securities, "Reaching out to those(unbanked) areas and raising deposits may be difficult initially."